I Was Wrong About Cisco Systems
When I took an early look at the first-quarter report from Cisco Systems , I expected the network-equipment vendor to deliver stronger-than-estimated sales. Driven by a bold, high-growth entry into the server-systems market, Cisco would surely leap over gloomy analyst targets and its own conservative projections.
Well, I was wrong. And not just a little bit.
Cisco beat Wall Street's earnings targets but missed revenue estimates by a long shot. This used to be a rare event, but now Cisco has missed two revenue targets in a row. Quarter-to-quarter misses happen, so this mini-trend alone is no reason to panic.
But I can't blame Cisco shareholders for dropping share prices by 12% overnight, taking 19 points off the Dow Jones all by itself.
Before today's plunge, Cisco stock had been beating the Dow over the past 12 months. Today, Cisco investors would have been better off with a Dow index fund. The five-year picture is even bleaker:
You see, we haven't even talked about the real bad news yet. Sales in the next quarter are expected to come in 9% below the year-ago quarter. This quarter's disappointing top-line take still showed 1.8% year-over-year growth, so the situation is clearly deteriorating.
Take a look at these tidbits from Cisco's earnings call, where management spilled several helpings of hard-to-swallow beans:
"Down to the last two weeks [of the quarter], we were disappointed by multiple hundreds of millions in terms of, what normally closed in the last couple of weeks," said CEO John Chambers.
"This not only affected our Q1 performance, but it also ended up with a significant shortfall in the backlog at the end of Q1, and that affects the business opportunity that we have going into Q2," clarified CFO Frank Calderoni.
"The sales team is really good, and so the fact that we missed that much in the last month and that much in the last two weeks, we clearly factored in [to guidance], assuming that we're going to continue to see challenges in this quarter and the next quarter," Chambers continued.
Companies that fail to close deals at the end of a quarter tend to claim that the revenue will come through in coming periods. Not Cisco; not this time. Cisco didn't just move some contracts into the next quarter but missed them altogether.
It's unclear whether Cisco's customers are holding back on their equipment orders in general (which would be a temporary, industrywide issue) or just turning to alternative vendors (which would be a structural market-share decline for Cisco specifically).
But Cisco pointed out two very specific weak points in emerging markets and the service provider industry. I can't help but notice that rival Alcatel-Lucent just landed a huge and much-needed equipment deal with the world's largest mobile network, China Mobile . The deal was announced without a price tag, but it's likely to be a life-saver for Alcatel. For Cisco, this might be one of the contracts that got away and ain't coming back.
It's quite possible that Alcatel gave China Mobile an overall price that Cisco just refused to match. Cisco refused several potential sales in this quarter in order to protect its gross margins. Strong margins are important, but you have to wonder whether Cisco's strategy of stubbornly sacrificing revenue to protect margins is sustainable. At this point, it looks like Chambers is letting the competition run away with a ton of crucial market share.
It's a little early to write Cisco off entirely, because the company still delivers top-notch products in a plethora of large and wide-margin markets. But do keep an eye on Cisco's sales execution over the next several quarters. The company can't afford to stick to its high-margin guns if it continues to bleed revenues and market share.
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The article I Was Wrong About Cisco Systems originally appeared on Fool.com.Fool contributor Anders Bylund has no position in any stocks mentioned. Check out Anders' bio and holdings or follow him on Twitter, LinkedIn, and Google+. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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